Tuesday, January 31, 2006

“Beef is Ugly”…How Does the Internet Look?

“Beef is ugly.”So stated Richard Bond, CEO of Tyson Foods on yesterday’s earnings conference call.Or, rather, lack-of-earnings call, because Tyson both missed the estimates for the quarter and guided down the full year by half, which you don’t see very often, except at companies like Tyson that not only don’t control their input costs—beef and chicken—but don’t control their selling prices either.

Like its CEO Mr. Bond’s namesake when he gets caught in one of those shrinking elevators devised by whatever evil nemesis is seeking his doom, Tyson is being squeezed on all sides: a Midwestern U.S. drought cut the beef supply, raised beef costs and, well, sliced beef margins. Meanwhile, Asian-Flu scares hurt international poultry sales, causing the chicken side of the business to, er, lose altitude.

More interesting than the miscues of a nuts-and-bolts food processing company will be the earnings calls from both ends of the Internet spectrum: Overstock.com next Tuesday, and Google tonight.

Expectations for high-growth, high-margin, high-everything Google run very high, with all eyes focused on sequential net revenue growth.

Depending on the analyst talking, Wall Street expects a minimum of 22% sequential growth (more than most growth companies experience year-over-year) and as much as 30% sequential growth (way more than most growth companies experience year-over-year). “Pro-forma” earnings should be at least $1.75 a share—and probably closer to $2.00 to satisfy the hoards.

I have no idea what the numbers will look like when Google reports after the close, but we have some clues that add up to strong numbers—particularly the fast growth in eBay marketing costs (eBay is Google’s largest user) and the continued ramp-up in online marketing spend described on many conference calls in the last two weeks.

Indeed, if the Alexa.com numbers are to be believed, Google usage has continued to grow substantially—significantly outpacing Yahoo!

You can see this yourself: go to Alexa.com’s “Traffic Rankings” page, type in “google.com” and then type “yahoo.com” into the “Compare Sites” function. You will see the Google blue line crossing the Yahoo red line—at least for internet users utilizing the Alexa.com toolbar.

Whatever the outcome tonight, I doubt there is much of a short-term “play” in Google stock, because short-term option volatility has soared to absurd levels and will almost certainly collapse the minute the press release hits the tape.I’d be willing only to bet that Google put buyers and Google call owners see little profit, unless Google management misses huge or beats very large.

Expectations are not so high, however, for Overstock.com, following its pre-announcement of weaker-than-expected sales in the 60% range, along with negative cash flow and earnings—a sorry state of affairs for a company whose CEO once said, “You tell me when you want me to stop growing at 80 to 100% per year, and I’ll tell you when we can get profitable.”

Judging by the urgent emails I get each day (“Month-End Closeouts – Hurry, Time is Running Out!” reads today’s version) from Overstock, as well as the reach and page view graphs on Alexa.com, I wonder how sales currently look at “Earth’s Biggest Discounter™” or whatever the company is calling itself these days.

Although it’s unwise to read too much into one data point, I have found the Alexa.com data to be a decent directional indicator. And as of now, they indicate flattish-to-downish year-over-year reach and page views on Overstock.com—in contrast to, for example, what looks like a nearly 100% year-over-year increase at Buy.com. Spikes in Overstock.com usage appear to correlate (and I stress "appear to") with changes in shipping fees.

Tyson will, no doubt, recover in time, thanks to the magic of market forces. I give Mr. Bond credit for one of the most direct statements about the state of his business on any conference call this season.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.Note: Last night Overstock issued the following statement:Overstock.com, Inc. (Nasdaq:OSTK - News) today announced that it is scheduled to release fourth quarter and full-year 2005 financial results before the market opens on Tuesday, February 7. An accompanying webcast and slide presentation are scheduled for 11:00 a.m. Eastern Time on Tuesday, February 7.Shareholder.com reported that the Overstock.com webcast was scheduled for January 31: that information was incorrect and should not have been published.

Just a question here - I agree that the analysts have very high (almost unreally high) revenue estimates for google this quarter - 1.29B vs. 1.05B last quarter - a 23% sequential increase. I'll assume the "traders" are looking for almost 10% over that.

Looking at their daily pageviews on Alexa (I'm assuming this is the more meaningful number than reach - but I could be very wrong about that) it looks fairly flat between Q3 and Q4 (about 5% increase, just looking at the graph.) Although January looks stronger already.

So where is Google supposed to make up the other 18% or so percent? Pricing?

What is Reach?Reach measures the number of users. Reach is typically expressed as the percentage of all Internet users who visit a given site. So, for example, if a site like yahoo.com has a reach of 28%, this means that if you took random samples of one million Internet users, you would on average find that 280,000 of them visit yahoo.com. Alexa expresses reach as number of users per million. Alexa's one-week and three-month average reach are measures of daily reach, averaged over the specified time period. The reach rank is a ranking of all sites based solely on their reach. The three-month changes are determined by comparing a site's current reach and reach rank with its values from three month ago.

What are Page Views?Page views measure the number of pages viewed by Alexa Toolbar users. Multiple page views of the same page made by the same user on the same day are counted only once. The page views per user numbers are the average numbers of unique pages viewed per user per day by the users visiting the site. The page view rank is a ranking of all sites based solely on the total number of page views (not page views per user). The three-month changes are determined by comparing a site's current page view numbers with those from three month ago.

Page views per million indicates what fraction of all the page views by toolbar users go to a particular site. For example, if yahoo.com has 70,000 page views per million, this means that 7% of all page views go to yahoo.com. If you summed the fractional page views over all sites, you would get 100% (this is not true of reach, since each user can of course visit more than one site).

++++++If you can figure out what all that means as it relates to tonight's numbers, let me know.

My suspicion is that the Alexa numbers are good at showing shifts in usage among Alexa users--as the Google vs. Yahoo graphs demonstrate.

But I would guess that Alexa toolbar users are not growing in line with the internet, so Alexa is not capturing growth outside Alexa itself.

Average Pages Views:Q404: went from about 13B to 15B = average about 14BQ105: Went from about 15B to 20B page views = average about 18 (impressive.)Q205: Went from about 20B to ~22B page views = average about 21Q305: Fairly flat to upish slightly = average around 22B, maybe slightly higherQ305: Fairly flat to upish slightly also = average around 23B, maybe slightly higher

From Q404 to Q1, they raised revenue 22% - this jives with the jump seen on alexaFrom Q2 to Q1, they raised revenue about 10% - kinda fitsFrom Q3 to Q2, they raised revenue about 14% - doesn't totally fit, but right in googles SEC filing it says "seasonal trends in the third quarters of 2005 and 2004 may have been disguised by certain monetization improvements to our advertising programs” Ok..

So seeing the above data, I don't see where Google drummed up a 23% sequence increase in revenue.. or at least the 28%+ it's going to need to please Wall street and justify adding about 50B in Market cap over the last 4 months or so..

but what the hell do I know, that's a very unscientific calculation.. but interesting nonetheless

Hate to ruin the whole Bond analogy, but actually it was John Tyson, CEO of Tyson who made the "beef is ugly" comments. Richard Bond is President/COO ... he said beef results were "dismal". Either way, definitely not "upbeat".

Options volatility on GOOG earlier today appeared to be counting on a 60 point move. Everybody I know, bull and bear, thought the option prices were ridiculous and pretty much ignored them. I rarely use terms like "everybody," but in this case, it really was everybody I talked to.

And everybody was wrong.

The options may very well have been right. Or, as the case often seems to be, the options volatility was the tail wagging the equity dog.

Glad to be off that train.

While I'm not much of a technician, I note that there's a nice big unfilled gap between 300 and 330. With this kind of drop, I think it's not unreasonable to suspect that the gap might get filled. Maybe not in the morning, but before a sustainable base can be built.